Editor’s Note: Welcome to our Points Principles series, an ongoing series dedicated to explaining the basics behind the confusing world of frequent flyer miles and travel rewards points. Follow along as we lay out some of the building blocks to travel for nearly free. And check back to the Points Principles page to see what ground we’ve already covered.
Travel (and life as we know it) is currently on pause due to the coronavirus pandemic. And that means the benefits on your travel rewards credit card are getting harder and harder to use.
Maybe you’ve got a card that gets you into airport lounges, like the Chase Sapphire Reserve or Platinum Card from American Express. With travel on hold, those benefits don’t mean much. The same goes for annual travel credits, hotel and rental car status, and more.
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When you can’t travel, paying the hefty annual fee for benefits you can’t use can be hard to justify. Your first impulse might be to cancel a credit card to avoid paying the annual fee.
Take our advice: Not so fast.
Perhaps that’s the right decision given your situation. But there are some questions you should ask yourself before canceling the card and chopping it up for good.
Is There a Retention Offer?
Before you get too far down the path of canceling a credit card, it might make sense to call or send an online message to the card-issuing bank to see if there are any offers to keep the card open. These are called retention offers.
Annual fees are big business for the banks, and they certainly aren’t shielded from the economic downturn created by COVID-19. Because of that, they may be willing to provide temporary annual fee relief, or even give you a big points bonus just for keeping the card open.
For example, we’ve heard from readers who were given 30,000 to as much as 50,000 American Express Membership Rewards points as a retention offer for keeping their Amex Platinum cards open for another year.
If that’s the case, it could make it much easier to keep the card versus canceling.
It never hurts to ask. Worst case scenario, there are no retention offers attached to your account. And that could make your decision to cancel easier. But not before moving onto the next question…
Have You Weighed the Card Benefits?
The premium travel benefits may be useless for now, but there are other perks to consider.
Some credit cards may be worth keeping open just for the bonus points you’ll get on your everyday spending or travel purchases. The Chase Sapphire Reserve’s 3x points per $1 spent at restaurants and travel come to mind.
Or take, for example, The American Express Gold Card. It earns 4x Membership Rewards points at U.S. grocery stores (up to $25,000 spent each year) and 4x Membership Rewards points at restaurants worldwide.
While other cards may offer higher bonuses on different spending categories, no single credit card can outpace the Gold card for what comprises such a large portion of my specific expenses.
Below is a breakdown of a recent exercise I did to determine whether or not the card is still worth it’s $250 annual fee.
For the sake of this analysis, I assumed each Membership Rewards point I earn is worth 1 cent each – a very conservative valuation. And I also assumed that my wife and I spend $100 a week at restaurants, on average.
- Weekly restaurant spend: $100
- X 52 Weeks in a year = $5,200
- X 4 Membership Rewards Points = 20,800
- X .01 (Membership Rewards Point Valuation) = $208
Total Benefit Value: $208
I also assumed for the sake of this analysis that my wife and I spend on average $125 a week at U.S. supermarkets.
- Weekly Supermarket spend: $125
- X 52 Weeks in a year = $6,500
- X 4 Membership Rewards Points = 26,000
- X .01 (Membership Rewards Point Valuation) = $260
Total Benefit Value: $260
So just from these two benefits alone, I am getting more value out of the card than I am paying for the annual fee. This made my decision to keep it open easy. It is why we always suggest doing the math before ruling out cards with larger annual fees.
Will I Lose My Points if I Cancel a Credit Card?
It’s a question that comes up for everybody who has ever opened a travel rewards credit card: “What happens to my points and miles after I close a credit card?”
The answer? It depends. Exactly what happens to your points and miles depends on the specific credit card, and which airline, hotel, or points program it’s associated with.
If you’re closing a co-branded card – a card tied to a certain airline or hotel like Delta, American Airlines, or Hilton – your points should be safe. Once the card-issuing bank deposits the points into either your Delta SkyMiles account or your Marriott Bonvoy account, they cannot claw the points back after you decide to close the credit card. They are yours to keep until you use them or they expire.
But if the card in question is issued directly from a bank like Chase, American Express or Citi, you will need to have a plan for your points before you cancel. This includes, but isn’t limited to, cards like the Chase Sapphire Preferred, Chase Sapphire Reserve, Capital One Venture, Amex Platinum, and Amex Gold cards.
If you have points in your account and you decide to cancel flexible points cards like the ones listed above, you will forfeit any and all remaining points in your account. The exception is that as long as you still have a card open that earns the same points, your points balance should be safe.
For example, if you hold both the American Express Platinum and American Express Gold cards and decide to cancel the Gold card, you will not forfeit any points because you still have a card open that earns Amex Membership Rewards points in the Amex Platinum card.
Because of this, you’ll want to make sure you use or transfer any flexible points before closing the account.
How Will This Impact My Credit Score
It may seem counterintuitive, but a credit card account with a zero balance is helping your credit score. And closing an otherwise inactive account will hurt you in at least two ways.
By closing a credit card, you will decrease the amount available credit you have to your name. Let’s say you’re thinking about closing an account with up to $5,000 of available credit. The moment you do, your total amount of credit decreases.
That $5,000 in credit you had is suddenly gone, making any outstanding balances you have in other accounts eat up a bigger share of your total available credit. This will negatively impact your overall credit utilization, a factor that accounts for 30% of your overall credit score.
Closing an open line of credit will also likely decrease the average age of your accounts, another significant factor in your credit score – making up 15% of the scoring equation. The longer it stays open, the higher your average account age will rise.
It might make sense to leave that empty account open, even when you’re not actively using it, as the age of the account and the extra available credit will help improve your credit score over time. But of course, your desire to close an account is likely not just based on your credit score. And any hit you take from closing the card will be temporary.
If the card doesn’t have an annual fee, there’s no reason to close the account whatsoever. This is helping your credit score with no out of pocket cost. And if there is an annual fee, you may want to inquire about a credit card product change.
Read more about how credit scores work here.
Can I Downgrade Instead?
If your credit card has an annual fee, and after all the considerations above you still wish to cancel, it might be worth seeing if you can downgrade – do what’s called a credit card product change – to a card with no annual fee. The benefit here is that the bank will view a product change as the same line of credit.
That means it won’t impact your average age of credit accounts, and it won’t impact your credit utilization ratio as the credit will still be available on the new card.
Take for example the Delta SkyMiles suite of credit cards. They have card options at several different annual fee price points. If you hold the $550 a year Delta Reserve SkyMiles card, instead of canceling it, you could product change it to the no annual fee Delta Blue SkyMiles card.
You would, of course, lose all the benefits associated with the Reserve card. But you would no longer have an annual fee, keep your average age of credit accounts intact, and your credit utilization ratio would remain unchanged.
Not all cards will be eligible for a product change, but it’s yet another option to consider before you close your credit card account outright.
Before you cancel a credit card, make sure to do some mental math and ask yourself these questions.
There are many situations in which closing a card makes sense. But there are also plenty of situations where it makes sense to keep the card account open.